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EXPLAINED | What caused turmoil in Chinese equities this week

EXPLAINED | What caused turmoil in Chinese equities this week

EXPLAINED | What caused turmoil in Chinese equities this week
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By CNBCTV18.com Oct 25, 2022 12:26:31 PM IST (Published)

Hong Kong and mainland China's equities stayed under pressure on Tuesday following the previous day's riot, after Chinese President Xi Jin Ping secured an unprecedented third leadership term, cementing his as the country's most powerful ruler since Mao Zedong.

Hong Kong and mainland China markets gained some ground amid volatile trade on Tuesday after a sell-off following President Xi Jinping's decision to pick a governing body full of loyalists while securing an unprecedented third leadership term. The development cemented Xi's place as the country's most powerful ruler since Mao Zedong.

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For Hong Kong, October 24 was the worst day for investors since the 2008 global financial crisis, with the benchmark Hang Seng tumbling more than six percent. China's Shanghai Composite finished two percent lower. The yuan hit a 14-year low against the US dollar. 
On Tuesday, equities across Asia were largely under pressure, with Hang Seng down 0.4 percent and Shanghai Composite down 0.1 percent at the last count amid volatile trade.
Analysts say a combination of factors spooked investors at the start of the week. Here's a look at some of the critical factors at play in China:
  • China's relations with the US have worsened during Xi's tenure
  • Traders fret that the new leadership may disappoint
  • Investors fear the US and China could engage in a conflict over Taiwan, a self-administered US-backed island that China claims as its own
  • China Plus One: A strategy being adopted by major businesses globally to avoid investing only in China and instead diversify elsewhere
  • China is losing manufacturing to Vietnam, Malaysia, Bangladesh, India and Taiwan
  • Fresh COVID-triggered restrictions in China's manufacturing hub Guangzhou; Lockdowns have hurt China's economy over the COVID years with food shortages and ill healthcare access
  • In an interview with Bloomberg earlier this month,  Bridgewater Associates Founder Ray Dalio said China has a lot of problems to deal with. Still, it is the main competitor in many industries, and its long-term investment picture remains bright.
    "From my getting to know the (Chinese) leaders, I don't know Xi, but those around him are reasonable people... You are going to, in my opinion, bring reasonable people, but there's a lot of uncertainties and problems which could be temporary or even longer lasting," said the billionaire investor.
    So what reminded the Hong Kong market of 2008 earlier this week?
    On Monday, the yuan hit its lowest level against the greenback since January 2008.
    The markets don't like the Xi style, veteran fund manager Samir Arora told CNBC-TV18 on Diwali. "People were putting money into China, the sort of the best example of the Stockholm syndrome, where you fall in love with your kidnapper, or the guy who's abusing you, deflating you, because of the performance that they've had since 1992; the returns are negative," said Arora, Founder of Helios Capital. 
    He believes that for India, it is the right time "because of the frustration and the pain that people would have had in China". He hopes foreign investors will return to Indian shares by January or February "because a new year always makes them reset their allocations".
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